He usually prefers multi-sector managers to high-yield managers, because they may seek high yield but aren’t forced to. But he sees some very cheap, well-managed high-yield funds that he says can be value plays. He points to the Ares Dynamic Credit Allocation Fund (ARDC). It traded at a 13.5% discount and yielded 10.9% in late April.

Going Bottom-Fishing
Even if the Covid-19 crisis and economic recovery are prolonged, it’s unlikely the premium discount on closed-end funds will widen to the levels seen in March, says Erik Herzfeld, president of Thomas J. Herzfeld Advisors, a boutique investment management firm in Miami Beach that focuses on closed-end funds.

In March, “everyone got home and opened up their accounts and started thinking they’re going to die from this horrible virus,” he says, “and people just started selling everything.”

He and his team really like debt investments in this environment. “Debt is pricing in the scariest, worst outcome,” he says, including a great depression and many defaults. “Equity is probably pricing in the best outcome.”

Herzfeld is particularly attracted to bank loans because investors are the first in the credit chain to get repaid. His firm, which entered 2020 with a lot of cash from selling off its master limited partnerships, has also shifted out of good instruments and into “junkier instruments” on this market move.

Most people prefer lower-rated securities when the market is good and shift into better-rated securities when the market gets scarier, he says. However, “my experience is companies that no one seems to worry about tend to be the ones that you should be worrying about,” he says, pointing to insurance giant AIG. “I’d rather take a company that’s more junky and be first in line [in the loan space] than be lower in the capital stack of a company that has less chance of going bad.”

Thomas J. Herzfeld Advisors got out of its MLPs in late 2019 because “they really didn’t ignite” when oil prices started to rally, says Herzfeld. “We thought if they’re not going to go up now, they’re not going to go up, period.”

Although he feels the energy markets are presently “uninvestable,” he says investors looking for exposure here can find some good discounts. It’s important to work with a team that understands MLPs very well and focuses on energy, he says (he points to Tortoise, a Leawood, Kan., energy investor, as a good example).

Herzfeld thinks lower-rated and non-rated municipal bond funds are interesting because they’re very cheap and trading at big discounts to net asset value. He suggests sticking with good managers (such as BlackRock, Pimco, Nuveen and Amundi Pioneer) that can evaluate issues they think may default.

In general, “you have to really dig in to understand what’s inside the funds,” says Herzfeld. “You can’t just look at the net asset value.”